USA Analyzing Changes in Return on Equity

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I'm trying to solve a problem relating to ROE and am looking for some help. I know ROE measures a company's ability to generate profits based on shareholders equity, and the higher the ROE number calculated, the more efficient the company is at using their equity to generate profits. That is pretty straight forward.

I'm not even sure how to clearly explain this but I will try. Where I am having problems is when ROE is being calculated based on losses or negative shareholders equity. Since a company could generate positive income of say $30,000 and have negative equity of say ($50,000) their ROE would be (60.0). If the company had a loss of ($30,000) and positive equity of $50,000 it would still come out to (60.0). The first example would seem very efficient because while equity was negative they still generated profit, yet while the second example calculated to the same number it seems in efficient because they were not able to efficiently generate profit from their equity and instead had a loss.

To confuse matters more, since either scenario would produce a negative number what happens if you are analyzing multiple years info and for example year 1 was (60.0), Year 2 was (70.0) and Year 3 was (80.0)? Would you say it improved year over year, or declined year over year?

Again I apologize if the question is confusing. I have tried to explain the situation as best as I can. The reason I ask the question is I am a low level underwriter and the sad fact is that I see a lot of financial statements where the customer has negative equity, losses or sometimes both and it makes analyzing the changes in ROE a little confusing.

Any help with this would be greatly appreciated!!!
 

Triest123

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ROE (Return on Equity) only concern the return on shareholders' investment.
It is not used to measure the efficiency of the company to generate operating profit.

Overall speaking, the shareholders are suffering loss from their investments if the company has positive income with a negative equity or if the company has a loss with a positive equity (i.e. negative ROE). In other words, negative ROE indicate that the investment is not attractive and the investors would perfer to invest money to other company or business which might get a higher return.


The Retun on Capital Employed (i.e. ROCE) is to measure the efficiency of the company to generate operating profit.
 

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